The Unintended Consequences of the ‘Free’ Internet

Three weeks ago, Apple Inc. chief Tim Cookripped into technology companies that “carefully assembled, synthesized, traded, and sold” then “weaponized” their users’ data. “These stockpiles of personal data serve only to enrich the companies that collect them,” he told a receptive audience in Brussels.

If executives at his unnamed targets—

Facebook Inc.

and Google parent

Alphabet Inc.

—rolled their eyes, you can understand why. Mr. Cook is, after all, talking his book: Apple makes its money by charging premium prices for its products. Google and Facebook make theirs by giving away their products and then selling ads.

Yet this is not just some internecine battle of billionaires. The zero-price business model is a source of many of the problems plaguing the Internet. It’s no coincidence that Google, Facebook and

Twitter Inc.

—which garner more than 80% of their revenue from advertising—are the ones most often accused of propagating toxic content and eroding privacy, while

Microsoft Corp.

and Apple, whose revenue comes from selling software, hardware and services, fly under the radar.

Think about why price matters: It’s how the market rations precious resources. A price signals to suppliers how much to invest in a product. It’s how a consumer decides whether that product is the best use of her budget.

A price of zero cripples that rationing role. When it comes to generating volume, free is a dream; when it comes to quality control, it’s a nightmare.

Of course, “free” comes in many forms online: Wikipedia is a labor of love. Many companies offer a free entry-level product in hopes of selling a premium version later.

By contrast, “free” is intrinsic to the profit model of search and social media: to generate ads they must maximize users and engagement, which results in the lowest possible barriers to their platforms. To target those ads, they must learn as much about their users as possible. This pits volume and revenue against quality and privacy.

This was not foreordained. “Free” grew out of tech’s early socialist ethos, according to Jaron Lanier, a computer scientist who was there at the time and went on to pioneer virtual reality. “We, the idealists, insisted that information be demonetized online, which meant that services about information, instead of the information itself, would be the main profit centers,” he wrote in his 2013 book, “Who Owns the Future?”

It also reflected technical and business realities of the day. There was no efficient way to charge tiny amounts online and by the 1990s users had become accustomed to free, Eric Posner and Glen Weyl write in their book, “Radical Markets: Uprooting Capitalism and Democracy for a Just Society.”

Of course, free services usually aren’t really free: users pay with their attention and data. This exposes them to a lot of useless and occasionally harmful content. For example, senders and recipients of email don’t pay postage. As a result, spam imposes $20 billion of costs each year such as the time spent deleting unwanted emails and extra server capacity to hold them, an “externality” analogous to air pollution, according to a 2012 study by Justin Rao and David Reiley in the Journal of Economic Perspectives. Spam generates revenue, a measure of its economic value, of just 1% of those costs.

Similar externalities are the fake and paid reviews intermingled with the “free” product advice consumers get on merchants’ web sites and the fake or manipulative news that contaminates their free news feeds. “In a world where communication is not just cheap but free, bad communication beats good communication because good communication requires effort,” Mr. Lanier said in an interview.

Is there an alternative? In a recent article, Mr. Lanier and Mr. Weyl, a researcher at Microsoft, propose that users be paid for their data via intermediaries modeled on artisans’ guilds or farmers’ co-ops. Absent legislation, this would be hard to implement. Moreover, ad-supported models have obvious benefits: People who can’t afford even a nominal fee get a wealth of services in exchange for attention and data they may not value much. Small businesses and social movements can reach their target audiences at a fraction of the cost of traditional marketing. Just 6% of Google’s clicks are on ads; they pay for the 94% of clicks that go to Wikipedia and other non-commercial sites.

Apple has carved out one alternate path. It prioritizes the privacy of its users and the quality of the content they see and is thus more restrictive about what apps can run on its devices than Google’s Android and more insistent that humans curate that content, one reason why Apple devices cost more.

Television provides another model. Like social media, broadcast TV was once an ad-supported oligopoly that aimed its content at the lowest common denominator. First HBO and now streaming services like Netflix Inc. have proven that consumers will pay for high-quality niche content.

But their potential goes only so far. Apple’s sales and market share have stalled as consumers balk at its prices. Netflix hasn’t proven it can sign up enough members to pay for its lavish production spending. For now, though, they represent the best evidence that zero-price need not remain the Internet’s monolithic model.

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